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The losses to Uruguay’s economy from its long-running pulp mill dispute with Argentina have reached a sum equivalent to more than 4 per cent of its gross domestic product and are threatening the unity of South America’s Mercosur trading bloc, according to Uruguay’s foreign minister.

The dispute has so far cost more than $800m to the country’s economy, against the $1.2bn value of foreign investment in the mill, said Reinaldo Gargano in an interview with the Financial Times.

“This disagreement bet-ween Argentina and Uruguay is weakening faith that we can we construct a South American community,” said Mr Gargano. “There are problems in Mercosur, and very severe ones too.”

The cellulose plant being built by Finland’s Botnia on the Uruguay River that separates the two countries is Uruguay’s largest ever foreign investment and an important boost to the economy that enjoys widespread support.

But Argentine demonstrators fear it will spoil their tourism, agriculture and environment. The plant is not due to open until later this year, but Argentine protest blockades of three border bridges across the Uruguay River have already caused the $800m cost to Uruguay’s tourism and trade, Mr Gargano said.

Last month the International Court of Justice in The Hague rejected Uruguay’s request to force the Argentine government to put an end to the roadblocks.

Mr Gargano said that Argentina’s failure to dismantle the roadblocks violates the Mercosur treaty, which is supposed to guarantee the free movement of people, goods and services between member countries.

The minister insisted that the only solution to the dispute is to end the roadblocks, Uruguay’s condition for negotiation with Argentina.

“I am hopeful that from now on the attitude of the Argentine government will be more open to dialogue,” said Mr Gargano, adding that the reaction of Néstor Kirchner, Argentina’s president, to the World Court’s decision, in which he expressed a willingness to negotiate, “seemed to me to be very constructive”.

But the dispute has brought relations between the normally close allies to historic lows. Mediation between the two countries is being carried out by an envoy of Spain’s King Juan Carlos I, as direct negotiation has been impossible since diplomatic relations were broken off last year. The two sides agreed at the weekend to hold talks in Spain.

The affair has also highlighted broader difficulties in the Mercosur bloc. Uruguay and Argentina, with Brazil and Paraguay, formed the bloc 16 years ago and welcomed a fifth member – Venezuela – last year, but last month put off membership negotiations with Bolivia.

The failure, or unwillingness, of Mercosur’s most powerful members, Brazil and Argentina, to take into account the needs of Uruguay and Paraguay has long been a source of discontent.

Uruguay has a trade deficit with the rest of Mercosur, since the tiny country is unable to produce at the competitive costs of its larger neighbours, and is thus – along with Paraguay – lobbying for preferential treatment, although so far with little success.

The failure of Mercosur to provide for Uruguay’s needs means that it is seeking to strengthen commercial links beyond the trade bloc, becoming on January 25 the first South American nation to sign a trade and investment framework agreement (Tifa) with the US.

“Our strategy is to have various countries that we can export to and not be prisoners of one particular market,” said Mr Gargano.

But Uruguay’s ruling Frente Amplio (Broad Front) is divided over how to tackle commercial challenges. Last August, Uruguay decided against signing a fully-fledged Free Trade Agreement (FTA) with the US, not for ideological reasons, says Mr Gargano, but because of “extraordinarily unfavourable” American agricultural ­subsidies.

Analysts agree that, with the majority of the government sceptical of abandoning Mercosur in favour of closer ties with the US, the Tifa is unlikely to lead to a FTA, given that this would not be compatible with full Mercosur membership.